Antonelli started out working in operations at Lehman Brothers in 1998 and then moved into the prime brokerage business where he has spent most of his career. He initially headed Nomura’s prime services team in Japan, where he lived for eight years before relocating to Hong Kong earlier this year.
What was the strategy behind moving you from Japan to Hong Kong?
To be Asia’s global investment bank you have to be good in Asia and that includes Asia ex-Japan. So for us to be able to demonstrate our success and strategy, it will be important to increase our footprint across Asia ex-Japan and that is where my focus will be.
How are the relationships along the chain between beneficial owner, agent/ custodial lender, prime broker and hedge fund changing?
It is evolving very quickly. Each firm within the ecosystem used to play a reasonably distinct role but these silos are falling down very quickly. It is all blending together. It is excessive to say that lenders are becoming borrowers and that borrowers are becoming lenders but it is true that there is a lot more greyness now.
The value proposition for beneficial owners is changing with the regulatory environment. The role of the lender is changing quite rapidly in terms of how they maximise profit and loss versus counterparty diversification, and the capital constraints that come with that. And the prime broker’s role is changing because of increased competition from custodian banks.
Are hedge funds becoming demystified?
Yes, because people now understand what happens on the other side of the fence. We are seeing vendors and banks approaching hedge funds directly. Those walls used to be really defined – it was the prime broker’s job to deal with the hedge fund but now it seems that anybody can get their hands on them. Knowledge that was once very closely kept is now becoming much more public. If that continues it is inevitable that the industry will become flatter.
This sounds like bad news for prime brokers such as Nomura.
Prime brokers will always be very relevant. They have the ability to quickly innovate products whereas banks traditionally do not move as quickly, and they do not necessarily have the appetite for that type of risk. I am in the camp that believes change is good. The competitive spirit forces people to do things better.
People used to sit on their laurels, doing the same thing year after year as long they made money. Now that a lot of banks are not as profitable, people are asking if this is sustainable for the next three to five years? There is going to be a massive amount of consolidation.
How can prime brokers add value in these difficult times?
First by sticking to their strategy but, ultimately, by defining what they’re good at. In a world that is becoming increasingly competitive and commoditised, it becomes more challenging for all of us to differentiate ourselves. Some heads of prime broker businesses would sit here and tell you how much better they are at everything than the guy sitting across the street – and it becomes increasingly difficult to quantify that.
It is about picking your strong spots and leveraging them. Being a one-stop-shop for hedge funds and all clients is a very bad business model. Everybody went for the wholesale supermarket model a few years ago and there is still some of that out there – but it can be very detrimental to an organisation.
Will we start to see a wave of consolidation among hedge funds?
You would expect to see more consolidation. I see more and more people giving it a run at smaller levels such as $5m, $10m or $15m but it is a game where the bigger are getting bigger and it becomes more difficult for the smaller ones to survive. Regulation will squeeze out the smaller funds because the cost of capital is going to increase from the primary broker to the secondary user of that capital.
The bigger hedge funds will be able to defend their turf because they have more leverage and combined business, and hence more claws into the prime brokers in respect to how they demand terms and allocate business. The small users do not have that leverage, so consolidation has to happen.
Some say that the Financial Transaction Tax (FTT) will ruin securities lending. Do you agree?
In the facilitation market, there is ultimately an end user looking to short sell securities but it goes through the ecosystem, to procure those assets and on-lend. If a FTT is implemented, nobody within that ecosystem is going to absorb the charges – so ultimately the end user will lose. If the end user starts rationalising this in his trading strategy the cash markets will lose liquidity.
Like short selling bans, it is just another measure that potentially impacts liquidity and will have a downstream effect within the securities financing industry. Then you have the pure securities financing industry where people are exchanging collateral for various purposes. So there is a massive amount of impact downstream in terms of how you think about optimising your balance sheet and your own trading book. That is a pretty reasonable concern.
I’ve heard one firm say it would end up paying $8bn in French transaction taxes, which is a far cry from the French government’s intention to raise $1bn across the market. If that $8bn figure is correct, clearly something is wrong. Are we solving the right problem and do we have the right solution to the problem? Those questions are not being asked. A lot of people in the industry don’t believe the FTT will happen – but it could happen. This is real. The regulators aren’t making rules just to play games.
Is the FSB’s working group on securities lending and repo going in the right direction?
We are answering the questions that they want us to answer but I am not sure what the goal line is – that hasn’t been very clear to me. These questions need to be answered.
Is Asia is in a good position to grow when regulation is tightening in the US and EU?
That is a tough question. There is such fragmentation in Asia and, a bit of what I call ‘internal competition’. All Asian markets want to be the next market of choice – they are all trying to figure out different ways to do that. Asia is still such a small part of the investment pool that its ability to influence worldwide regulation may not be that big right now. But it has the potential to be great because the maturity of the US and Europe will affect it and hence we should see continued interest.
How are Asian regulators responding to international rules?
Asia’s regulators and exchanges are very sympathetic to what is going on in the rest of the world. But there is an attitude of “let us figure out our own backyard first”, basically deciding what they want and how they will get there before adapting to international standards. At the Pasla/RMA conference, some people asked: “Why is India making this so difficult? What is so bad with the international model?” I do not think they
Will US and EU regulation have a big impact on the region?
The biggest thing that concerns me is extraterritoriality – not just with the EU FTT but how all of these rules and regulations affect other parts of the world, both directly and indirectly. You just need to be able to understand what the depth of the impact is but sometimes this is not very clear when these rules and regulations come out, which just adds to the heightened level of confusion that already exists.
I do not think Asia is going to react to any of these regulations rapidly and an FTT already exists in the cash market in Asia. Asia understands how to deal with these things and potentially how to implement them. But anything that the US or EU does is going to have a very material impact on the way Asia will think about formulating its markets. There is a great risk of overregulation particularly for the more mature markets. You eventually put up so many barriers that it just becomes unreasonable to continue transacting in that space or that asset class. So we have to be careful.
Which Asian emerging market excites you the most?
Malaysia. I think it is trying to change. Korea and Taiwan are opening up but they are not there yet due to government regulations and certain restrictions that are imposed on stock lending in a static market. And then you have somewhere like Malaysia that just made some changes to its onshore lending facilities. The numbers are empirical proof that it is making progress.
There will be some bumps along the way but the fact that they are willing to work with some of the offshore participants, as well as understand and protect the retail investors and beneficial owners, is pretty good. The biggest challenge around Malaysia is the capital market activity.
A lot of the demand in that has traditionally been around using stock borrowing and lending as a hedging facility for convertible bond activity. We do not see much interest from the hedge fund community solely for outright shorting in Malaysia. Market capitalisation just is not large enough in a lot of these securities.
What are the main challenges with Taiwan?
Taiwan could be a fantastic market. It is attracting a lot of interest and is trying to be progressive but it still imposes certain barriers that do not allow maturation to happen as quickly as it should. You still do not have the ability to simply borrow and lend securities and the currency is closed so it is not a currency that you are able to easily convert.
It becomes very prohibitive for beneficial owners to get interested in lending to the Taiwanese market because they do not see the value proposition. The onshore markets are tough as the collateral arrangements are quite high – there is a 50% haircut when you post equity as collateral – so it is not really a financing business. It is more of a transactional and flow business.
What keeps you awake at night?
My concerns are around the macroeconomic environment. I am worried about the things that you cannot always see or plan for so I am the tail guy. In terms of the industry itself, you have to expect things to change. There was such strong language from the regulators post-2008 that all the stuff we are experiencing now is somewhat expected.
Again, my fear on the back of that is the implementation. There is such a demand on resources to fundamentally change the footprints of investment banks that there is exhaustion. We run the real risk of losing talented individuals to other industries and becoming less innovative because innovation is not rewarded.
Can Asia become a true rival to the US and Europe?
Asia’s a great story. But I want to see it in numbers rather than just hearing the stories. You hear that markets are opening up – but what does that really mean? Are those regulators going to allow certain funds and managers to raise assets onshore and offshore? Will they allow them to prime broker with offshore counterparties? Those questions need to be answered.
It is progressive. It is exciting. Things are moving and people want to do things out here. I think people that are committed to the region can find some real long-term benefits, but if you have a very tactical strategy it could be really difficult for you and there are going to be a lot of immediate obstacles both locally and globally including regulation. There are going to be a lot of obstacles to drive reasonable tactical strategies, so you have got to be committed.
What attracts you to the region?
What I like about Asia is that there are a lot of markets, so there are a lot of problems. I am a guy who likes to fix things so I get really excited about it. It used to be regarded as a hardship location and it is not easy for people to take their families out here. But you can really learn something about these markets and learn something about yourself. I certainly have.